The Great Debate

As President Barack Obama’s first term ends and second begins, it is an opportune time to reflect on the cost and sheer volume of new red tape his administration has created; analyze its impact on small businesses, and prepare for what’s next.

The Obama administration has pursued an active regulatory agenda. The overall regulatory burden is now $1.8 trillion annually, according to the Competitive Enterprise Institute, and this year alone new rules have added $215.4 billion in compliance costs. Small businesses are understandably concerned that the second Obama term will only add to this already heavy regulatory burden.

There has already been a wave of “economically significant” regulations ‑ those with an annual impact of $100 million or more ‑ that outpaced both the Clinton and Bush administrations. That pace slowed leading into the 2012 elections, but a second wave has been building.

We don’t know its exact size because the Obama administration has not published the required unified regulatory agenda in 2012, which identifies new rules that agencies plan to issue in the short- or long-term.

As Washington debates a fiscal cliff on spending and taxes, we should not forget the regulatory avalanche that awaits businesses in the New Year. Roughly 4,100 new regulations are in the pipeline, according to the government’s website. Not all these regulations will affect small businesses. Many will, however ‑ and the compliance costs for small firms will exceed that of their large competitors by some 36 percent.

The U.S. Securities and Exchange Commission’s case against Citigroup’s Brian Stoker, a director in the bank’s Global Markets group, seemed clear-cut. Stoker structured and marketed an investment portfolio consisting of credit default swaps. The agency accused him of misrepresenting deal terms and defrauding investors for not disclosing the bank’s bet against the portfolio while pitching the investment vehicle to customers. But when it came to trial earlier this summer, the government could not prove that Stoker knew or should have known that the pitches were misleading, and the jury didn’t convict.

It’s hardly surprising. The SEC’s failure to secure a guilty verdict is one more sign that the commission still has not climbed out of the morass in which it was mired for most of the Bush years. The agency tasked with overseeing some 5,000 broker-dealers, 10,000 investor-advisers, 10,000 hedge funds, and 12,000 public companies, as well as mutual funds, the exchanges and even the rating agencies, is ailing because of outdated rules, systems and structures.

What exactly ails the SEC? For starters, the legal framework in place to prosecute securities fraud is flawed. The commission was established to create rules that prohibit “any manipulative or deceptive device or contrivance.” But intent or recklessness is required to prove fraud or misrepresentation, and that can be difficult because the agency doesn’t have enough staff to comb through reams of documents for rare evidence that someone intended to cheat. In the Citigroup case, the agency instead relied on a rule that simply required a showing of negligence, but the prosecution could not prove even that.

Three years ago, President Obama signed the Family Smoking Prevention and Tobacco Control Act into law. Those of us present knew we were witnessing history. With the stroke of a pen and strong bipartisan support from Congress, the Food and Drug Administration was charged with protecting public health from tobacco use – the nation’s single most preventable cause of disease, disability and death. More than 1,200 people die each day in the United States because of cigarette use. That is one person every 71 seconds. Today, I am pleased to report that the law is working.

In passing the Tobacco Control Act, Congress recognized that the linchpin of any successful strategy to reduce adult tobacco use must be to prevent young people from ever starting. More than 80 percent of adult U.S. smokers begin smoking as teens. Each day more than 3,800 young people under age 18 smoke their first cigarette, and more than 1,000 become daily cigarette smokers. Reversing this trend requires aggressive action on two fronts: reducing the attractiveness of tobacco products to children and ending their access to them. That’s exactly what the FDA is doing.

During our first 12 months of regulating tobacco, the FDA pulled candy and certain other flavored cigarettes off the market; issued tough new regulations to halt sales of cigarettes, cigarette tobacco, and smokeless tobacco to young people; banned brand-name sponsorship of sporting events and concerts; and implemented requirements for new warning labels for smokeless tobacco products. The FDA also has begun funding state authorities to assure vigorous enforcement of these new actions to protect our children.

This is a response to an excerpt from Paul Ingrassia’s Engines of Change: A History of the American Dream in Fifteen Cars, published this month by Simon & Schuster.

The causal stretch by Paul Ingrassia over three decades and millions of intervening human events leads him to conclude that “decades after its demise, in the election of 2000, the Corvair’s legacy improbably helped to put George W. Bush in the White House.”

Egads! – as the British say. His otherworldly trek through American history reminds me of Edward Lorenz’s “butterfly effect,” in which the trail of a tornado is traced all the way back to the flapping of a butterfly’s wings thousands of miles distant. It is one thing to lament the deadly, dancing design of the Corvair until the 1965 model, when the stabilizing, dual-link suspension system was finally installed; it is quite another to burden this automotive offspring of GM’s Ed Cole with the lawless, corporatist, war-starting, anti-democratic Bush regime selected by five Supreme Court justices-turned-Republican politicians in their 5-4 dictate of Bush v. Gore.

This is an excerpt from Engines of Change: A History of the American Dream in Fifteen Cars, published this month by Simon & Schuster.

However it unfolds, this year’s U.S. presidential election is unlikely to be as close as the one America experienced in 2000. That election was decided, after months of contention and suspense, by disputed ballots and a razor-thin result in Florida.

The historic events, however, were set in motion 40 years earlier by a badly flawed automobile, the Chevrolet Corvair. In the mid-1960s the Corvair made Ralph Nader famous. It also made lawyers ubiquitous, thereby making lawsuits one of the great growth industries of the late 20th Century. And decades after its demise, in the election of 2000, the Corvair’s legacy improbably helped to put George W. Bush in the White House. The car’s story is one of genius, hubris, irony and tragedy, not to mention unforeseen long-term effects on American life and thought.

Preet Bharara’s work rooting out insider trading is good news for U.S. investors, as long as you’re not one of the 240 people being investigated. But until governments tackle insider trading on a global basis, it’s like playing Whac-A-Mole. If your business model includes insider trading, you can pop up in Hong Kong or London almost as easily as Tokyo and Shanghai without much fear of prosecution.

That number — 240 people — is shocking. Prosecutors already have 57 convictions or guilty pleas since Raj Rajaratnam was arrested in October 2009, dozens more than during the Wall Street scandals of the 1980s. Bharara told the New York City Bar Association that insider trading on Wall Street was rampant. Rengan Rajaratnam, Raj’s brother, encapsulated the culture cynically but perfectly. Optimistic about his efforts to recruit a McKinsey consultant to their gang, he said to Raj, “Scumbag. Everybody is a scumbag.”

Alan Greenspan once famously said that the “market” would sort out financial fraudsters — regulators weren’t needed. Now we know the market actually includes quite a number of fraudsters who don’t seem to mind doing business with one another at all.

On the basis of “stress tests” it ran, the Federal Reserve has given permission to most of the largest U.S. banks to “return capital” to their shareholders. JPMorgan Chase announced that it would buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents a share, up from 25 cents a share.

Allowing the payouts to equity is misguided. It exposes the economy to unnecessary risks without valid justification.

Money paid to shareholders (or managers) is no longer available to pay creditors. Share buybacks and dividend payments reduce the banks’ ability to absorb losses without becoming distressed. When a large “systemic” bank is distressed, the ripple effects are felt throughout the economy. We may all feel the consequences.

By John Kemp
The writer is a Reuters market analyst. The views expressed are his own.

LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?

It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.

The views expressed are his own.

What will happen in 2012? In the spirit of the aphorism “The future is not something to be predicted, it’s something to be achieved,” let me suggest 20 transformations (which Reuters will publish in four groups of five; the first can be found here). We need to make progress on these issues now to prevent next year from being a complete disaster.

These ideas are based on the research I did with Anthony D. Williams to write our recent book which comes out in January 2012 as a new edition entitled Macrowikinomics: New Solutions for a Connected Planet.

All 20 are based on the idea that the industrial age has finally run out of gas and we need to rebuild most of our institutions for a new age of networked intelligence and a new set of principles – collaboration, openness, sharing, interdependence and integrity. These big ideas will be the focus of much of my writing next year.

The author is a Reuters columnist. The opinions expressed are his own.

A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.

Not so long ago -- before casinos, currency and commodities speculation, and credit default swaps became big business -- U.S. courts would not enforce gambling debts.

Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.